Senate Shift to Ripple Across Industries

The expected defection of Sen. James M. Jeffords of Vermont from the Republican Party could markedly affect the drug, HMO, defense, credit card and tobacco industries, money managers and investment analysts said Wednesday.

“I don’t see any upside for the [stock] market. This looks like gridlock of the worst possible kind,” John Carey, manager of the Pioneer Fund, said of the switch, which would give the Democrats control of the Senate for the first time since 1995 and increase their ability to slow President Bush’s legislative agenda.

“The market was beginning to feel confident that the regulatory burden on business would ease,” he added, “and there was even hope for business-friendly legislation. But no longer.”

Analysts said the clearest winners in a switch to a Democratic Senate could be lenders Fannie Mae and Freddie Mac, whose status as government-sponsored enterprises is expected to remain intact. Both stocks were up strongly Wednesday despite a weak market.

Still, most analysts said it’s unlikely that a change in the balance of congressional power would lead to what Carey termed “radical anti-business legislation.” And President Bush’s income tax cut, passed by both houses and headed for a conference committee, also is expected to remain intact.

“But I wouldn’t expect another tax cut next year, not anymore,” said Greg Valliere, chief political analyst in Charles Schwab’s Washington Research Group. “The Jeffords defection, if it happens, doesn’t mean the Bush agenda is in tatters. It does mean gridlock for a lot of businesses.”

Here’s how some major industries could be affected:

* Drug makers

A Democratic Senate could produce a public relations nightmare for the pharmaceutical industry, already under scrutiny over the pricing of some medications.

“They can apply more heat to the pharmaceutical industry and inflame issues, such as [supposedly] charging too much for drugs,” said Tom Miller, a policy analyst with Cato Institute, a conservative think tank.

“There’s a headline risk. You know, ‘Ted Kennedy Holding Hearings on Drug Companies,’ ” added Valliere. Kennedy (D-Mass.) is in line to be chairman of the Senate Health Committee.

Analysts said such tactics aren’t likely to result in legislation, given Republican control of the House.

Still, Andy Laperriere, a political economist at International Strategy & Investment Group in Washington, said Democratic Senate control at least would revive the “potential threat of price controls in some form.”

* HMOs

Those stocks were hard hit Wednesday, perhaps as investors envisioned industry critic Kennedy shaping a so-called patient’s bill of rights or Medicare reform.

Still, a power shift could work in Bush’s favor if Kennedy and fellow Democrats were to block administration health-care proposals at every turn, said Alan Skrainka, chief market strategist at brokerage Edward Jones. The GOP could end up gaining seats in the midterm election next year, he said, by campaigning against stonewallers.

* Defense and aerospace

Most analysts said the expected shift would probably have little impact on the defense industry, even if the leadership changes in the key committees such as Armed Services and Appropriations, since both sides of the aisle agree on the need for more defense spending.

But debate over already contentious issues such as missile defense and whether to restart production on the B-2 Stealth bomber could intensify.

“These would be bones of contention anyway but maybe more so with the Democrats’ added power in the Senate,” said Paul H. Nisbet, analyst with JSA Partners.

Some analysts said defense stocks have run up since last summer on hopes of increased spending, perhaps leaving them vulnerable.

* Credit card issuers

The bankruptcy reform bill approved by both houses, considered a boon for major credit card issuers like MBNA and Bank One, could be watered down or even killed, Laperriere said.

* Energy

Some money managers suggested environmental restrictions pushed by emboldened Democrats could hinder a variety of energy companies.

“This news is good for the caribou, that’s about it,” said Pioneer’s Carey, referring to the chances that a Democratic Senate could block efforts to drill for oil in sensitive arctic areas. “They can breathe easier.”

But a Senate shift might not hurt energy companies as much as some expect, analysts said. If the Democrats use their Senate control to block elements of the president’s new energy plan, it could be a plus for wholesale power merchants and traders such as Enron, Reliant Energy and Duke Energy, said Merrill Lynch analyst Donato J. Eassey.

“With gridlock you’re going to have uncertainty, and uncertainty causes volatility, which is good for [traders],” Eassey said.

Bush’s plan to open the Arctic National Wildlife Refuge to limited oil and gas exploration was politically dicey even before the possible Senate change, several analysts said.

The majority of oil field services firms might actually do better if the Alaskan proposal failed, according to analyst Poe Fratt of A.G. Edwards. Only a handful of such companies stand to benefit from development of the wildlife refuge tract, he said.

If exploration is blocked there, “more companies will benefit from drilling elsewhere,” he said.

* Tobacco

Huge jury verdicts against cigarette makers in recent years “really started when industry executives got dragged before the Senate,” Laperriere said, so tobacco companies wouldn’t look forward to another round of hearings. He called new hearings “a real possibility” if the Democrats are running the Senate.

* Fannie and Freddie

Laperriere said the threat of policy changes that would affect regulation of Fannie Mae and Freddie Mac would be diminished under a Democratic Senate.

He noted that instead of Phil Gramm (R-Texas) leading the Senate Banking Committee, it would be led by Paul S. Sarbanes (D-Md.), a major supporter of the popular lending agencies.

* Telecommunications

Some analysts said chances for deregulation--for example, allowing the Baby Bells fully into the long-distance market--won’t survive a power shift in the Senate.

“There was hope that the Telecommunications Act, which has actually impeded competition, might be revisited,” Carey said. “If this [Jeffords situation] is bad news for any industry, it’s telecom.”

But several analysts and investors said the market impact of the Jeffords defection already has been overblown. “The biggest thing we needed from this administration was the tax cut, and it looks like we’re getting it,” said Robert Nichols, chairman of Windward Capital Management in Los Angeles.

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Times staff writers Denise Gellene, Thomas Mulligan and Peter Pae contributed to this report.

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